What is Statement of Insolvency Practice 16 (SIP 16) and what does it mean for Pre-Pack Administration?
The Insolvency Service (a Government Agency) has issued a statement saying it will use Statement of Insolvency Practice 16 requirements for administrators using this tool. The SIP requires the administrator to report to creditors on their actions as follows.
A 2015 version can be seen here - It includes information about the pre-pack pool (set up to review cases from 2nd November 2015 via an online portal). You can apply to have the case reviewed by the pool here: https://www.prepackpool.co.uk/. The service costs £950 + VAT.
Insolvency Practitioners should be clear about the nature and extent of their role and their relationship with the directors and officers of the insolvent company in the pre-appointment discovery period. Where they are instructed to advise the company, they should make it clear that their role is to advise the company and not to advise the directors on their personal position.
The directors should generally be advised to take independent legal advice, particularly if there is a possibility of the directors acquiring an interest in the assets in the pre-packaged new business or newco. The government has drafted legislation following the Graham Review in 2014 that looks at the sales to connected parties and has concluded that an "evaluator", who is independent, will need to look at the viability of the newco and report to the IP. Read this article for more indepth analysis
Practitioners must bear in mind the duties and obligations which are owed to the body of creditors in the pre-appointment period. They should be mindful of the potential liability which may attach to any person who is party to a decision that causes a company to incur credit and who knows that there is no good reason to believe it will be repaid, this could lead to wrongful trading issues.
When considering the restructuring or sale of the business or assets, the administrators should bear in mind the requirements of the Insolvency Act 1986. In administration these provide that:
- The administrator must perform his functions in the interests of the company’s creditors as a whole, and
- Where the objective is to realise property in order to make a distribution to secured or preferential creditors, the administrator has a duty to avoid unnecessarily harming the interests of the creditors as a whole.
Administrators engaged in a pre-packaged sale should therefore be able to demonstrate that they have considered the above. If creditors believe that their interests have not been considered they may complain to the Insolvency Service or the IP's regulatory body.
Where a pre-pack is used the following information should be disclosed to creditors in all cases, as far as the administrator is aware after making his or her enquiries:
- The source of the administrator’s initial introduction, in other words how did the case arrive on his desk.
- The extent of the administrator’s involvement prior to appointment and any marketing activities conducted by the company and/or the administrator.
- Any valuations obtained of the business or the underlying assets. We would always advise obtaining independent valuations.
- The alternative courses of action that were considered by the administrator, with an explanation of possible financial outcomes in each scenario.
- Why it was not appropriate to trade the business, and offer it for sale as a going concern, during the administration.
- Details of requests made to potential funders to fund working capital requirements and whether efforts were made to consult with major creditors
- Details of the assets involved and the nature of the transaction to newco
- The consideration for the transaction, terms of payment, and any condition of the contract that could materially affect the consideration.
- If the sale is part of a wider transaction, a description of the other aspects of the transaction.
- The identity of the purchaser, directors and any connection between the purchaser and the directors, shareholders or secured creditors of the company.
- The names of any directors, or former directors, of the company who are involved in the management or ownership of the purchaser, or of any other company into which any of the assets are transferred.Whether any directors had given guarantees for amounts due from the company to a prior financier, and whether that financier is financing the new business.
- Any options, buy-back arrangements or similar conditions attached to the contract of sale.
In our belief the pre-pack to a connected party will be a difficult "sell" now to creditors, unless all of these issues are carefully considered and noted. Where a business is pre packed to a third party, independent of the directors and possibly even secured creditors, then it will still be a very powerful and rapid tool.
The Enterprise Act 2002 and case law supports the use of the pre-pack sale but we also believe that in some cases this will be open to challenge, unless ALL of the issues above are considered and answered as part of the scheme. Other wise more pre packs could face challenge in court.
To complain about the misuse of a pre-pack administration see this web page or call the Insolvency Service hotline on 0845 601 3546,
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Please note that the guide includes updates due to Covid-19 For instance there have been some changes to insolvency legislation that limits creditors actions and relaxes rules regarding wrongful trading. A new 20 day moratorium for distressed businesses has also been introduced.